In many ways, the forex market shines like a beacon to new investors who are in search of a viable profit. After all, this space is now worth in excess of $1.934 quadrillion, which is a staggering 2.5-times larger than the global GDP.
However, not everything that shines is golden, and there’s no doubt that the volatile and highly liquid forex market can be incredibly precarious for investors. It’s certainly possible to lose more than your initial deposit size, so there’s a pressing need to approach the market with care as a newcomer.
In this post, we have created a brief beginner’s guide to forex trading, while exploring its core markets and the terminology used prominently in the marketplace.
Defining the Forex Market and its Various Entities
Let’s start by defining the forex market, which is global in its scope and (as the earlier figures suggest) vast and incredibly lucrative.
In practical terms, it governs the exchange of global currencies, primarily for the purpose of international trade. However, it also allows investors to trade in specific currency pairings, with this type of asset incredibly liquid and easily convertible into cash without losing market value.
There are three primary markets operating within the space, starting with the ‘spot’ market. This refers to the purchase or sale of forex ‘on the spot’, which means that the exchange takes place at the exact time that the trade is settled. This enables you to transact currency pairs at a real-time market rate, known as the spot price.
The second option is the ‘forwards’ forex market, which is an over-the-counter entity that sets the price of a currency pair for future delivery.
Finally, there are ‘futures’ markets, which differ from forwards trades as they’re conducted through a central market rather than over-the-counter contracts.
In simple terms, forex futures are standardised contracts to buy or sell currency at a fixed date and time, with the final settlement price used to determine an eventual profit or loss.
What are Pips and Hedges?
One of the most important terms used in the forex market is pips, which is a standardised unit and the smallest amount by which a currency quote can change. Typically, it’s $0.0001 for U.S Dollar related pairings, while the standardised nature of the pip helps to protect you from seismic losses.
Interestingly, you can also use a dedicated pip calculator prior to execute tradings, with this a viable risk management tactic that is available through most viable brokers.
Another key piece of terminology is ‘hedging’, which is essentially a strategy that can be used to protect your position in a currency pair from a sudden or adverse price movement. So, if you enter into a trade and are concerned about a particular macroeconomic or political development, hedging provides a short-term safeguard that can offset losses.
The simplest example of this is provided by ‘simple hedging’, which enables you to offset the basic forex risk in relation to a single currency pair.
How to Choose a Forex Broker
When it comes to choosing a viable forex broker, your first consideration should be the transaction fees applied to your trades. While these tend to be minimal in the forex market, there are subtle nuances, so you’ll need to compare the market to guarantee the best deal.
Similarly, each broker offers different volumes of leverage, and this is important as high amounts enable you to open larger positions with your initial deposit.
We’d also recommend prioritising brokers that are compatible with the MetaTrader, but this should apply to the vast majority of platforms in 2021.
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